(Adds detail on Toyota in 9th and on GM in 20th paragraph, updates share price)

German luxury-car maker BMW AG (BMW.XE) and Japan's auto giant Toyota Motor Corp. (7203.TO) Friday agreed to extend their cooperation pact to include the development of light-weight components, fuel cells and electric power trains. The agreement is the latest example of auto makers teaming up to share the surging costs of new technology needed to meet tightening environmental regulations.

BMW, the world's leading premium-car maker by sales, and Toyota, Japan's largest auto manufacturer, said they would also cooperate on developing a new sports car.

"Toyota and BMW share the same strategic vision of sustainable individual future mobility," BMW Chief Executive Norbert Reithofer said at a press conference in Munich.

In March, BMW and Toyota inked an agreement to cooperate on developing lithium-ion battery cells having signed a memorandum of understanding in December. As part of the deal, BMW will supply Toyota's European division with 1.6 liter and 2.0 liter diesel engines from 2014.

The two companies have now decided to deepen their ties. "We respect each other--and I think this is shown by our taking the next step only six months since the signing of our initial agreement," Toyota CEO Akio Toyoda said.

"I am excited to think of the cars that will result from this relationship," Mr. Toyoda said. The tie-up includes the "joint development of architecture and components for a future sports vehicle," BMW and Toyota said.

BMW's engine technology is regarded as state-of-the-art in the car industry. Toyota is known for its highly-efficient production methods and has pioneered the development of hybrid cars via its Prius model.

Mr. Toyoda has been aggressive about linking up with other auto makers to work on advanced technologies, a change in direction for the Japanese company. Since taking control, he has directed the company to take a stake in electric car company Tesla Motors Inc. to make a plug-in RAV4, has created a partnership with Ford Motor Co. (F) to develop hybrid-electric power trains for full-sized pickups, co-created a sports car with Fuji Heavy Industries Ltd's Subaru and now the BMW partnership.

Almost 60% of new-car sales in Europe, roughly nine million vehicles, will be powered by electric power trains by 2025, according to a report published this week by consulting firm A.T. Kearney.

"Hybrid [cars] will gain importance in all segments," said Gotz Klink, the head of A.T. Kearney's automotive team.

The share of purely battery-powered cars, however, is expected to remain fairly small with around 12% of the market, A.T. Kearney said.

BMW's Mr. Reithofer said the industry's change towards electric mobility is comparable with the shift from the typewriter to the laptop and tablet computer or the change from analog to digital photography.

"I believe this is the most decisive moment our industry has ever faced," he said.

"Together we have a great opportunity to continue leading our industry," Mr. Reithofer said. It was "too early to say" if the tie-up with Toyota will lead later to a more formal joint venture.

Entering alliances and cooperations has been a trend in the global auto industry in recent years as the technology challenge of meeting stricter emission regulations worldwide have added to the industry's already heavy development costs. The challenge is particularly acute for luxury-car makers given the larger engines used to power premium sedans and sports utility vehicles.

The European Commission--the executive body in the EU--is expected to propose next month to limit CO2 emissions on average to 95 grams per kilometer by 2020 having set a target of 130 g/km by 2015.

BMW's decision to tighten its ties with Toyota coincides with shifting alliances in the European industry but also follows some recent unsuccessful cross-border partnerships.

Last week, BMW said it is reviewing its hybrid technology joint venture with PSA Peugeot-Citroen SA (UG.FR) after General Motors Co.
GM, -2.10%
bought a 7% stake in the struggling French constructor in March as part of a wide-ranging cost-saving alliance. The deal sparked speculation that Peugeot's cooperation projects with other auto makers could raise conflicts of interest.

BMW and GM have held inconclusive talks over jointly developing fuel-cell technology. A spokesman for BMW said there are no longer talks with GM.

NordLB analyst Frank Schwope said Volkswagen AG's (VOW.XE) ill-fated tie-up with one of Toyota's Japanese rivals Suzuki Motor Corp. (7269.TO) highlighted the risks cultural differences can pose for a cross-border alliance. But he said BMW's deal with Toyota could work out well if both companies focus on their respective core strengths, Mr. Schwope said.

At 1428 GMT, BMW stock was up 4.7% at EUR56.68, outperforming a 3.9% rise of the DAX30 blue-chip index.

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